Prime Minister John Key was right to identify that any solution to our savings problem should be 'home skewed'.

Confirming a government backed review into pensions, Key identified that New Zealand had a foreign debt and local savings problem. The obvious answer is to save more domestically and the obvious mechanism is to make KiwiSaver compulsory while also retaining the current universal New Zealand Superannaution system as a safety net.

But what if that money saved compulsorily is then simply shipped offshore to be invested in foreign companies and assets?

That's what is happening at the moment.

Currently 69 per cent of the NZ Super Fund's (Cullen Fund) $15.6 billion of assets is invested offshore, once the cash invested here is included in the total. It's 81 per cent without cash.

Just over 40 per cent of the $5.5 billion invested in KiwiSaver has been invested overseas.

That means that collectively around 62 per cent of these extra savings are being invested overseas.

That's because of modern portfolio theory that says all our eggs shouldn't all be put in the New Zealand basket and because our own capital markets are so weak.

Yet we clearly have a capital shortage in New Zealand. Small to medium businesses are screaming out for domestic equity. Many growth companies, such as Navman, TradeMe and NEXT Window, have ended up bringing into foreign capital to grow.

What we have is a capital markets failure.

Investors are very wary of investing in the local stock market, which means it doesn't grow and means it isn't attractive for local fund managers.

There is a big chicken and egg problem.

John Key needs to make sure either that there are capital controls of some sort on all this extra compulsory saving that might be done. Or his government needs to ensure that we have an excellent and liquid set of capital markets that can connect our small, medium and large companies with all that cash.

This raises some deeper questions.

Should we have capital controls?

Do we trust the global capital markets?

Will equity still provide the best returns over the long run?

Would we be better off simply reducing government debt rather than investing in stocks?